Equity MFs beat FDs for long-term wealth
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Generate Returns That Are Higher Than Inflation
Sankalp Khanna, 31, is a
government employee and lives in NCR with his wife Manisha, 31, a
working woman. The couple and their 2-year-old son Saksham live with
Sankalp's parents.
What are they saving for?
A house worth Rs 30 lakh after 10 years. Rs 30 lakh for son's education after 10 years and an additional Rs 15 lakh for his marriage. A corpus of Rs 1 crore for retirement.The couple wants to enhance medical cover for Sankalp's parents or find an alternative solution. They also want to go on a foreign trip.
These costs will be revised on the basis of inflation.
Where are they today?
Cash flow:
The couple's annual gross inflow from all sources is Rs 9.28 lakh. This is against a total outflow of Rs 8.62 lakh, which includes routine family expenses, regular savings and insurance premiums.
Net worth
: The total assets are worth Rs 8.95 lakh. These include personal assets in the form of a car. The couple's invested assets are worth Rs 6.84 lakh and cash & near-cash assets worth Rs 2.11 lakh. Currently , they live in Sankalp's father's house. There is no outstanding liability .
Contingency fund:
The balance in savings bank account and FD comes to Rs 2.11 lakh, against mandatory monthly expenses of Rs 43,000. This is approximately five months' reserve.
Health & life insurance:
Sankalp has a Rs 3-lakh health cover, while Manisha and Saksham have Rs 2-lakh each. Both parents have a health insurance of Rs 1 lakh. Sankalp, being a government employee, has support from his employer as well. Further, Manisha's employer also provides health cover of Rs 2 lakh for the entire family . Sankalp has life insurance of Rs 9.54 lakh, mainly by way of investment-oriented policies.Savings & investments: The couple's balance in savings bank account is Rs 1.07 lakh.Their invested assets include PPF worth Rs 15,000, FDs worth Rs 1.17 lakh and recurring deposit worth 1.98 lakh.
Fiscal analysis
Both Sankalp and Manisha are saving 39% of their total income. This is commendable considering they have a small child and aging parents. There is a need to enhance both health and life covers. Sankalp's life cover is only investment-oriented.
The way aheadContingency fund
: Usually , we recommend a fund equivalent to about three months' mandatory expenses to meet contingencies. However, considering Sankalp's aging par ents, he should continue to maintain the existing reserve.The couple must ensure that about Rs 30,000 is kept at home in cash.
Health & life cover:
The couple must enhance health and life covers over a period of time.For parents, there are two options: (i) Opt for plans that will not provide protection for the initial few lakhs but will reimburse expenses beyond a particular level. (ii) Create an independent corpus in the form of an FD to meet health-related expenses. For Sankalp, Manisha and their son, the couple can purchase a family floater of Rs 20 lakh. Also, Sankalp's life cover needs to be increased gradually by Rs 50 lakh in the next two-three years and an additional Rs 50 lakh in the next five years. This must be done by way of term plans.
Planning for financial goals
Home buying:
The couple can start an SIP of Rs 5,000 in equity-based mutual funds. About three years prior to purchasing a home, they can transfer the corpus into a debt instrument like FD. They should use this corpus for the down payment of a house. Their corpus in the recurring deposit can also be used for the down payment. For the residual amount, they can take a loan.
Son's education & marriage:
The couple can create a common pool for funding their son's education and marriage.They can start three SIPs of Rs 2,000 each in a large-cap equity fund, a gold fund and an international equity fund. They must increase the SIP amount by 15% every year. From the pool so created, they can use the funds as required.
Retirement planning:
For the time being, the couple can continue with their contribution to EPFPPF. Once they purchase their home, they can start an SIP in an equity fund to create a corpus.
Planner's Eye
A savings rate of 39% is commendable. Any couple who can save more than 30% with the responsibility of a young child and aging parents will achieve most financial goals because they get used to living frugally in the early part of their life. The Khannas need to become a little more aggressive and invest in equity mutual funds. While FDs and recurring deposits are good investment vehicles, they generate returns that are less than the rate of inflation in the long run.
A house worth Rs 30 lakh after 10 years. Rs 30 lakh for son's education after 10 years and an additional Rs 15 lakh for his marriage. A corpus of Rs 1 crore for retirement.The couple wants to enhance medical cover for Sankalp's parents or find an alternative solution. They also want to go on a foreign trip.
These costs will be revised on the basis of inflation.
Where are they today?
Cash flow:
The couple's annual gross inflow from all sources is Rs 9.28 lakh. This is against a total outflow of Rs 8.62 lakh, which includes routine family expenses, regular savings and insurance premiums.
Net worth
: The total assets are worth Rs 8.95 lakh. These include personal assets in the form of a car. The couple's invested assets are worth Rs 6.84 lakh and cash & near-cash assets worth Rs 2.11 lakh. Currently , they live in Sankalp's father's house. There is no outstanding liability .
Contingency fund:
The balance in savings bank account and FD comes to Rs 2.11 lakh, against mandatory monthly expenses of Rs 43,000. This is approximately five months' reserve.
Health & life insurance:
Sankalp has a Rs 3-lakh health cover, while Manisha and Saksham have Rs 2-lakh each. Both parents have a health insurance of Rs 1 lakh. Sankalp, being a government employee, has support from his employer as well. Further, Manisha's employer also provides health cover of Rs 2 lakh for the entire family . Sankalp has life insurance of Rs 9.54 lakh, mainly by way of investment-oriented policies.Savings & investments: The couple's balance in savings bank account is Rs 1.07 lakh.Their invested assets include PPF worth Rs 15,000, FDs worth Rs 1.17 lakh and recurring deposit worth 1.98 lakh.
Fiscal analysis
Both Sankalp and Manisha are saving 39% of their total income. This is commendable considering they have a small child and aging parents. There is a need to enhance both health and life covers. Sankalp's life cover is only investment-oriented.
The way aheadContingency fund
: Usually , we recommend a fund equivalent to about three months' mandatory expenses to meet contingencies. However, considering Sankalp's aging par ents, he should continue to maintain the existing reserve.The couple must ensure that about Rs 30,000 is kept at home in cash.
Health & life cover:
The couple must enhance health and life covers over a period of time.For parents, there are two options: (i) Opt for plans that will not provide protection for the initial few lakhs but will reimburse expenses beyond a particular level. (ii) Create an independent corpus in the form of an FD to meet health-related expenses. For Sankalp, Manisha and their son, the couple can purchase a family floater of Rs 20 lakh. Also, Sankalp's life cover needs to be increased gradually by Rs 50 lakh in the next two-three years and an additional Rs 50 lakh in the next five years. This must be done by way of term plans.
Planning for financial goals
Home buying:
The couple can start an SIP of Rs 5,000 in equity-based mutual funds. About three years prior to purchasing a home, they can transfer the corpus into a debt instrument like FD. They should use this corpus for the down payment of a house. Their corpus in the recurring deposit can also be used for the down payment. For the residual amount, they can take a loan.
Son's education & marriage:
The couple can create a common pool for funding their son's education and marriage.They can start three SIPs of Rs 2,000 each in a large-cap equity fund, a gold fund and an international equity fund. They must increase the SIP amount by 15% every year. From the pool so created, they can use the funds as required.
Retirement planning:
For the time being, the couple can continue with their contribution to EPFPPF. Once they purchase their home, they can start an SIP in an equity fund to create a corpus.
Planner's Eye
A savings rate of 39% is commendable. Any couple who can save more than 30% with the responsibility of a young child and aging parents will achieve most financial goals because they get used to living frugally in the early part of their life. The Khannas need to become a little more aggressive and invest in equity mutual funds. While FDs and recurring deposits are good investment vehicles, they generate returns that are less than the rate of inflation in the long run.
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